Junk market closes out dull week, looks to "back to work" scenario; Level 3 to cut debt

By Paul Deckelman and Paul A. Harris

New York, Jan. 3 - The junk bond market pretty much sleep-walked through an uneventful session Friday, with little seen in the way of price movements. Traders said that even with the beginning of the new calendar year, many players were absent Thursday and Friday, figuring that nothing of any consequence would emerge from a week with an early market close (Tuesday) and a holiday (Wednesday) right in the middle. It was expected that those participants would eye a return on Monday and get down to business at that time.

"There was nothing going on worth talking about," a trader said. "No one came in after New Year's and it was just slow. Everyone was talking about Monday being the day for going back to work."

What was he even doing there?

"All of us were very optimistic that maybe someone was doing business [Thursday] or [Friday]. It didn't happen that way. We're all troupers, so we came in - but everybody else has left and I'm going in the next five minutes."

Before he left, he noted that there wasn't even any activity in the one junk credit which actually had some tangible news out on Friday. Level 3 Communications Inc. announced that it had received approximately $46 million in cash as its share from the sale of a toll road in Southern California, and that by selling the non-core asset, the Broomfield, Colo.-based telecommunications operator's long-term debt would be reduced by approximately $139 million.

Level 3, in addition to its core telecom business, is 65% owner of California Private Transportation Company, which sold the 91 Express Lanes toll road in Orange County, a suburb of Los Angeles, to the county's municipal transportation authority.

But the trader noted that "by the time the announcement came out," at around 2 p.m. ET, "most people were already leaving," hoping for an early weekend getaway. The rush for the exits was accelerated by the prospect of rough, sloppy weather for the evening commute home in New York.

"The bonds did nothing in response," he said, with the company's benchmark 9 1/8% senior notes due 2008 having edged up perhaps half a point at most, to 64 bid/65 offered.

"Maybe the rise was in anticipation of an announcement," he ventured - "but we haven't seen anything after the announcement."

Elsewhere, a trader saw "a little pop" in the bonds of beleaguered telecom operator WorldCom Inc. and WorldCom's MCI long distance unit.

The WorldCom bonds, he said, had pushed as high as 26.25 bid/26.75 offered, from prior levels around 25.5 bid/26 offered, with most of the activity coming in the morning, before 9 o'clock ET. At the same time, MCI's bonds, which previously had been offered around 52 with no bids, were being quoted at 52.5 bid/53.25 offered. "People were looking for those bonds again today," he said.

Friday's editions of The Wall Street Journal reported that MCI, the nation's second-largest long-distance carrier, is planning to boost per-minute rates on Feb. 1 on two popular plans, Anytime Calling and Anytime Advantage, by 29% - a two-cent rise from seven cents per minute to nine cents per minute. Customers of a third MCI plan, Select 200, will pay the new nine-cent rate only for calls beyond the 200 minutes covered by the plan's monthly fee, the article said.

The rate rise will be the second in as many months for MCI, which in December raised the per-minute rates on some other calling plans to nine cents from five cents, and will be the fourth such increase since MCI's corporate parent, Clinton, Miss.-based WorldCom, was driven into Chapter 11 last year.

A spokesman for the carrier was quoted as saying that the rate increases had nothing to do with the bankruptcy, but were being enacted in response to conditions in the long-distance market. Both of MCI's major rivals, AT&T Corp and Sprint Corp. have also recently raised rates.

The trader said that the rest of the telecom sector was "pretty quiet" outside of a small, short-lived morning "flurry" in Qwest Communications International Inc. He said another benchmark telecom name, Nextel Communications Inc.'s 9 3/8% notes due 2009, were unchanged at 91.5 bid.92.5 offered.

Outside of the telecom sphere, Tenet Healthcare Corp.'s still nominally investment-grade bonds were being quoted somewhat lower, on news that the Justice Department is expanding its probe of its Medicare billing practices in regards to its outlier patients - those who are considerably sicker than the norm and require more expensive treatment. Justice issued subpoenas for documents from Santa Barbara, Calif.-based Tenet, the Number-Two U.S. hospital operator, and 19 of the company's 114 hospitals. Tenet said it would cooperate with the probe.

Tenet's 6 3/8% notes due 2011 dipped to 90.25 bid from 91 previously. The company is a former junk issuer which was upgraded to investment grade in 2001 in response to improved financials, but the federal scrutiny that began last fall has its ratings teetering precariously near junk levels and its bonds once again quoted in dollar-price terms rather than spreads over Treasuries, as most high-grade bonds are.

A market source said he saw no real trading in the Tenet bonds. "All there were were offerings, with no close bids, but no movement."

He quoted the 6 3/8% notes as being quoted around 91 Friday.

Wickes Inc. bonds were quoted at 51 bid/53 offered, up a point on the session, the Vernon Hills, Ill.-based home improvement products retailer apparently shrugging off the warning by industry leader Home Depot Inc. that it would report a large fourth-quarter sales decline.

The trader noted that Wickes' paper was up around five points in the last few weeks.

The primary market also remained tranquil on Friday. Characterizing the quietness, one sell-side source remarked that senior members of the fixed-income teams seemed not to be in the building.

"We didn't even have the morning meeting today," one sell-side official offered by way of illustrating the lack of activity in the primary market.

However, sources said, the new issuance market won't necessarily remain dormant for long.

"There is $5-$6 billion in the new issuance pipeline that we're expecting to come in the four to six weeks," one source told Prospect News on Friday.

"We hear there is plenty of cash on hand," the source continued noting that the week ending Jan. 1 saw an additional inflow of $120.936 million to the high yield mutual funds.

"We've seen about $4.8 billion of inflows," the source continued. "With the exception of one week which had an outflow of around $400 million the market has been positive since Oct. 10."

This official went on to say that the late-2002 high yield rally created conditions which presently favor the primary market.

"The problem we have right now is that on the secondary side the rally has made things quite tight," the official said.

"Not every sector is as attractive as it was a few weeks ago. The question is, 'How much higher can it go?'

"Gaming is trading at 600 basis points over Treasuries. How much tighter can it get? You have lodging at 654 over, and when you talk to the analysts they are less than optimistic about the lodging sector; they don't think it's going to be a very good place to be given the economic conditions and revenues for available rooms.

"There is opportunity for new issues to come in," the official said. "I think people will pay par for some bonds and hope to clip the coupon, as opposed to paying 96-98 for something that was trading at 70 a few weeks ago.

"The primary will probably carry the market for a while."

This official went on to say that the fourth quarter rally created pent-up demand among the investors.

"Last year most of the sectors posted positive returns," the source said. "You look at the chemical sector which ended the year at 5% total return. Paper and packaging, a cyclical sector, was up 16% for the year. Steel was up 5.8%.

"You had some meltdowns in cable and you had continued weakness in telecommunications, transportation and utilities," the official conceded. "And the worst is not over for those guys.

"All the other sectors carried the weight and pushed us barely into positive territory. Now the question is how much further can they rally? Can you buy the bonds? Can you find them?

"I think this is a good time for people who can issue to come to the market because investors do have cash and they want to put it to work.

"My guess is that once the floodgates open issues will be oversubscribed again."

When Prospect News pressed sell-side officials for names of prospective new issuers - ones likely to emerge sooner than later into the new issuance market - no names were forthcoming on Friday.

And it was interesting to note that names heard to be first quarter 2003 business - TRW Automotive, Legrand, Trump Casino, Dole Foods and Loew's Cineplex - failed to elicit so much as an affirmative grunt during conversations with sell-side sources on Friday.

Noting that there are some sectors to which the market is conspicuously open (gaming, broadcasting and energy were mentioned), one source suggested that as the week of Jan. 6 gets underway the primary market will regain its legs at a moderate pace. And as it does so it is likely to produce some surprises.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.